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PensionTsunami's primary focus is on California's public employee pension crisis, but we also monitor news in other states, keep an eye on the world of corporate pensions, and follow developments in Social Security since it is taxpayers who will ultimately be responsible for making up deficits incurred by any of these retirement plans. We also try to monitor international trends. The editor of PensionTsunami.com is Jack Dean (JackDean-at-PensionTsunami-dot-com).

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February 18th

For those working in the private sector who will not be getting a generous state or local government defined-benefit pension (backstopped by taxpayers), this MarketWatch article has some good advice on how much you’ll need to save for your golden years.

Posted in Baby Boomers at February 18th, 2017 by Jack Dean| Comments Off on Good retirement advice for private sector workers on how much you’ll need to save

February 10th

By Ed Ring | “Without disputing the figures, Monique Morrissey, an economist with the Economic Policy Institute in Washington, D.C., said the findings are misleading because they do not compare specific classes of employees or account for differences in education levels and total hours worked.” — From California Is Golden State For Public Employees, by Michael Carroll, AMI Newswire, Jan. 31, 2017

Ms. Morrissey has a point, even though there was no intent to “mislead.” While our recent study “California’s Public Sector Compensation Trends,” found that full-time public sector workers in California earn pay and benefits that average at least twice as high as their counterparts in the private sector, going into comparisons by specific class of employee was beyond the scope of that particular study. But Ms. Morrissey is missing the forest for the trees.

First of all, as acknowledged in Carroll’s article where Morrissey is quoted, the study found that California’s public employees earn pay and benefits that average 39% higher than their public sector counterparts in the rest of the U.S. So especially in California, we conclude there are two classes of workers – public sector workers, whose 2015 pay and benefits averaged $139,691 for full-time work (if you properly fund their pensions), and private sector workers, who, very best case, earned pay and benefits that averaged $62,475.

Everybody knows that public sector workers have, on average, higher levels of education than private sector workers. Should this translate into average (and median, by the way) total earnings that are twice what all private sector workers receive? It challenges credulity.

Ms. Morrissey’s biography states “She is active in coalition efforts to reform our private retirement system to ensure an adequate, secure, and affordable retirement for all workers.” Bravo. That is a goal we share. And so in the spirit of aligning ourselves with practical, feasible, equitable objectives towards achieving that goal, Ms. Morrissey is invited to answer the following questions:

(1) Do you think what public sector pensions (ref. CalPERS, the largest) pay to California’s government retirees should be three to five times what Social Security offers private sector retirees?

(3) Defenders of unaltered state/local government pension benefits in California argue that pension benefits are primarily paid for via investment returns. But they claim investment returns can average 7.5% per year (4.5% after adjusting for inflation), “risk free.” Are YOU, Ms. Morrissey, willing to personally guarantee that MY retirement investments will earn this much? Because if you are, I’ll invest every penny I’ve got with you.

(4) Our “apples-to-apples” comparison of California’s new “Secure Choice” pension option for private citizens yielded the following comparisons: (a) Public sector: Teachers/Bureaucrats, 30 years work – pension is 75% of final salary. (b) Public sector: Public Safety, 30 years work – pension is 90% of final salary. (c) Private sector: “Secure Choice,” 30 years work – pension is 27.6% of final salary. Do you think this disparity is fair to private sector workers?

(5) Can you explain why public sector pensions are not subject to the same conservative funding and investing rules as private sector pensions are under ERISA?

(6) Do you support government programs that offer ALL American workers the SAME retirement benefits, subject to the SAME formulas and incentives, or not?

In reference to our recent CPC study, Ms. Morrissey is also on record as saying “There have been a lot of attacks on public-sector unions because their members have been a stalwart voting block for the Democratic Party, but that doesn’t mean they’re overpaid.” This remark suggests Ms. Morrissey thinks nonpartisan “attacks” on government unions aren’t justifiable and won’t happen. That is incorrect.

Government unions, unlike private sector unions, have the ability to negotiate for financially unsustainable pay and benefits because they control their bosses through campaign contributions, because their bosses are politicians instead of businesspeople, and because these pay and benefit packages are paid for through coercive taxes instead of via allocations of precarious profits.

Government unions have created two tiers of workers in this country. Government workers not only have unaffordable pay and retirement security, but their union leaders have an incentive to support government policies that destabilize and divide this nation, because that will create the need for even more unionized government workers. Government unions, intrinsically, are economically damaging and politically authoritarian.

“Unsustainable” means that sooner or later an end will come. When the money is gone, Morrissey and her gang will have a lot more questions to answer.

January 18th

By Ed Ring | There are two intertwined themes that define unionized government in California. First, funding government retiree pensions will soak up every new source of tax revenue they will ever collect. Second, cloaking new taxes and fees – and new agencies – in the virtuous raiment of environmentalism will deflect criticism and demonize critics. Here’s why:

Now that Democrats have a super-majority in California’s state legislature, expect to see plentiful new taxes to pile onto the $5.0 billion in new state and local taxes that were approved by voters on November 8th. After all, California’s projected 2017-18 state budget still has a $1.6 billion deficit. And that’s nothing. Here is a look what sort of deficit challenges California’s state and local governments are actually facing:

During 2015, California’s state and local governments combined contributed about $34 billion to their employee pension funds. As can be seen on the chart, even if those funds could earn 7.5% per year, on average, year after year, for the next several decades, they were $4.0 billion short. At 6.5% returns, which is the new rate projection that CalPERS is adopting, they were $18 billion short. At 5.5% returns, which is the rate used by the credit rating agency Moody’s when evaluating the fiscal health of cities and counties, they were $33 billion short. Every year.

As reported in the Los Angeles Times, California Democratic lawmakers are proposing a 17-cents-per-gallon gas tax increase, indexed to inflation, and a diesel tax increase of 30 cents per gallon. This assault on consumers joins California governor Brown’s proposal to add $65 to the annual Vehicle Fee.

As for environmentalism – what better reason to increase the vehicle license fee, or increase the tax on gasoline? From an extreme environmentalist’s perspective, it’s every bit as much a “sin tax” as the new taxes on sodas and cigarettes. And there’s real money to be had – over $2.0 billion per year on the license fees and over $7.0 billion per year on the gasoline taxes. As for fixing roads? Move over. The pension funds are between $4.0 and $33.0 billion short, or more, depending on who you ask. Per year.

Another “green” source of revenue that has the potential to contribute billions to the coffers of unionized government are California’s new “cap and trade” fees, quietly implemented over the past few years. Here, from the state budget summary, are how some of these funds are proposed to be spent next year:

Here are three additional points that exemplify the chain of cause and effect, linking the interests of public sector unions, environmentalists, and (very counter-intuitive) the Wall Street establishment:

– Politicians controlled by public sector unions declare new infrastructure – freeways, utility upgrades, improved water infrastructure, upgraded grid, investment in airports and seaports, etc., to be environmentally unsound. The real reason, however, is they want the tax revenue to go to increasing pay and benefits for public employees.

– Environmentalists come up with a “market-based” way to curb dangerous greenhouse gasses, an “emissions auction” plan, which in turn (1) enables Wall Street trading firms to collect a fee on literally every BTU of fossil fuel consumed in America, and (2) empowers public sector agencies to redefine their jobs (mass transit workers, firefighters, code inspectors, teachers – even police since crime increases during hot weather) as coping with, educating about, or mitigating the effects of global warming, allowing these government agencies to collect the proceeds of the emissions auctions.

– Without an endlessly appreciating asset bubble, every public employee pension fund in the United States would go broke. To pump up this asset bubble, environmentalist restrictions artificially accelerate price appreciation for land, housing, gasoline, electricity, and other basic needs. And of course, financial institutions reap spectacular profits during periods of rapid asset appreciation, and property taxes go up.

There’s nothing wrong with reasonable environmental regulations. Nobody wants to go back to the 1970’s, when the air in California’s coastal cities was dangerously polluted. But these new laws aren’t cleaning our air. They’re making it impossible to build homes, or roads, or civil infrastructure. They’re hyper-regulating our industries – right down to trying to control how often our dairy cows burp. They are becoming as tyrannical as they are absurd.

The next time your state legislator or your local elected official comes up with a a new tax or fee they justify on environmentalist grounds, follow the money. Because ALL new taxes and fees end up in the pension funds, paying for retirement packages worth far more than the average taxpayer can possibly hope to achieve.

January 11th

By Ed Ring | A just released study calculates the total state and local government debt in California as of June 30, 2015, at over $1.3 trillion. Authored by Marc Joffe and Bill Fletcher at the California Policy Center, this updates a similar exercise from three years ago that put the June 30, 2012 total at $1.1 trillion. As a percent of GDP, California’s state and local government debt has held steady at around 54 percent.

For a more detailed analysis of how these debt estimates were calculated, read the studies, but here’s a summary of what California’s governments owe as of 6/30/2015:

This total, $832 billion, ignores the fact that these pension obligations are officially calculated based on a return on investment projection that currently hovers between 7.0% and 7.5%, depending on which pension system you consider. But CalPERS, the largest of California’s roughly 90 major state and local government worker pension funds, has already determined they will have to lower their rate of return projection to 6.5%, an action that when emulated by other pension systems will immediately raise the unfunded calculation from $258 billion to $390 billion.

Our estimate, which is uses the assumptions municipal credit analysts for Moody’s now use when evaluating the credit-worthiness of cities and counties, uses a rate of return projection of 4.4%. That rate is based on the Citigroup Pension Liability Index (CPLI), which is based on high grade corporate bond yields. This rate is far more “risk free” than 6.5%, much less 7.5%, and when you apply this rate to calculate the present value of the future pension obligations facing California’s state and local governments, the unfunded liability soars to $713 billion, bringing the total of bonds, OPEB and unfunded pensions to $1.29 trillion.

This $1.29 trillion does not include deferred maintenance and upgrades to California’s infrastructure, nor does it include California’s share of federal debt. More on that later.

For the moment, let’s just assume the pension funds manage to earn around 5.5% per year. That’s less than the reduction to 6.5% they’re already acknowledging, but it’s more than the 4.5% that professional credit analysts are already using when reporting credit ratings for government agencies. That 5.5% assumption would put California’s total state and local debt right around a $1.0 trillion. How much would it cost to pay off a cool trillion in 30 years at a rate of interest of 5.5 percent?

Seventy billion dollars. That’s over $5,000 per year for every household in California. Just to make payments on debt. That’s before any payments for ongoing services.

It gets worse.

As noted in the study, if one allocates federal debt according to state GDP, the share affecting Californians adds another $1.8 trillion to their debt burden. Again, using rough numbers, we’re now talking about $15,000 per year, per household, just to make payments on local, state, and federal government debt.

Nobody knows how this will unwind. If interest rates rise, debt service will rise proportionately. To spark inflation to whittle away the impact of debt payments may be the most benign scenario, but only if inflation affects wages and not just assets. Most scenarios aren’t pretty.

The study concludes:

“Combining California’s debt with publicly held federal debt, we estimate a total debt-to-GDP ratio of 125% (or 153% using the broader definition of federal debt). This level places California distressingly close to peripheral Eurozone countries that faced financial crises in 2011 and 2012. Portugal’s 2015 debt-to-GDP ratio was 129% and Italy’s was 133%.”

While recommendations were beyond the scope of this study, here are three:

(1) Reform pensions and compensation for government workers so they experience the same financial challenges and opportunities as the citizens they serve. Cap pension benefits at twice the maximum Social Security benefit (around $62,000 per year). At a minimum, enact these reforms for all future work performed, both by new and existing public sector employees.

(2) Invest a significant percentage of California’s pension fund assets in infrastructure projects here in California. By using a lower rate-of-return projection, pension funds can compete with bond financing. They will earn a risk-free rate of return, California will rebuild its infrastructure, and millions of citizens will be put to work.

(3) Reverse the extreme environmentalist agenda that controls California’s state legislature. Enact reasonable reforms to enable development of land, water, and energy to lower the cost-of-living and encourage business growth. Private sector unions should be aggressively leading the charge on this.

There are a lot of good reasons why California is probably not destined to endure the financial paroxysms that already grip nations such as Italy and Portugal. Our innovative spirit and creative culture still attracts the finest talent from around the world. But California’s political leadership will have to admit there’s a problem, and make some hard choices. Hopefully when they finally do this, they will be thinking about the citizens they serve.
Ed Ring is vice president of policy research at the California Policy Center.

Posted in California, Financial at January 11th, 2017 by Jack Dean| Comments Off on California’s total government debt rises to $1.3 trillion

January 9th

The Stanford Institute for Economic Policy Research (SIEPR) has updated its Pension Tracker website to include 2015 data for California’s 1,700 CalPERS and independent pension systems, according to the site’s architect, Professor Joe Nation.

The site also provides 2015 estimates for pension debt for CalSTRS and the UC Retirement System. These estimates in the aggregate show that the state’s market pension debt in 2015 is just under $1 trillion ($76,884 per household) with debt for each system as follows:

– CalPERS (including the Public Employee Retirement Fund, Judges’ Retirement Funds I and II, and the Legislators’ Retirement Fund): $444.2 billion or $34,415 per household

– Independent county, city and special district systems: $236.7 billion, or $18,335 per household.

– California State Teachers’ Retirement System (CalSTRS): $246.3 billion, or $19,083 per household.

– University of California Retirement System (UCRS): $57.0 billion or $3,376 per household.

SIEPR will be adding CalSTRS data for more than 1,000 school districts late this month or early in February, according to Nation.

Nation noted that these 2015 actuarial pension debt estimates on Pension Tracker do not include the effects of the recent CalPERS decision to lower its assumed rate of return (also called the discount rate) from 7.5% to 7%.

Posted in California, Joe Nation, Pension Data at January 9th, 2017 by Jack Dean| Comments Off on Stanford’s Pension Tracker website updated to include 2015 data for CalPERS

December 26th

By Ed Ring | In a press release from the National Conference On Public Employee Retirement Systems (NCPERS) dated December 19, 2016, the California Policy Center, and its spinoff online publication, UnionWatch, were both chosen, for the 2nd year in a row, as one of only 28 “policy and research organizations” that NCPERS has deemed to be “Think Tanks that Undercut Pensions.” Ponder the significance of this excerpt from that same press release: “Under the Code of Conduct, NCPERS urges its corporate members to disclose whether they contribute to these organizations.”

What exactly were the transgressions of the California Policy Center, and UnionWatch, that earned them a place on this list of undesirables? That earned them an admonition from NCPERS to its corporate members to boycott us, or else? Here is their list of criteria – and, briefly, our response:

How to be a think tank that gets blacklisted by NCPERS:

(1) Advocate or advance the claim that public defined-benefit plans are unsustainable.

Guilty. Public pension funds cannot possibly withstand the next market downturn. Unaltered, they will either bankrupt public institutions or cause taxes to be raised to punitive levels.

(2) Advocate for a defined-contribution plan to replace a public defined-benefit plan.

Not guilty. Our organization does recognize however that defined-contribution plans may be the only recourse, if significant changes are not made to restore financial sustainability to defined-benefit plans.

(3) Advocate for a poorly designed cash-balance plan to replace a defined-benefit plan.

Not guilty. We have not invested our resources in serious review of this policy option.

(4) Advocate for a poorly designed combination plan to replace the public defined-benefit plan.

Guilty, except that, of course, we believe a well designed combination plan could work. An example of this, fruitlessly advocated by California Governor Brown, is the “three legged stool” solution: A modest, sustainable pension, participation in Social Security, and a 401K savings plan with a modest employer contribution.

(5) Link school performance evaluations to whether a defined-benefit plan is available to teachers and school employees.

Not guilty. While it is probably true that providing teachers with the golden handcuffs of back-loaded pension benefit formulas guarantee the poor performers will stay on the job while those with talent will be more likely to pursue other employment options, we have not done any investigative work in this area. We applaud those who have.

More to the point, we applaud any corporate interest with the courage to stand up to American’s government union controlled pension systems by supporting pension reform organizations. They have a lot to lose.

Anyone who needs evidence to back up our assertion that government pension systems are joined with powerful financial special interests should consider the relationships between NCPERS and their “corporate membership.” NCPERS describes itself as “the principal trade association working to promote and protect pensions by focusing on Advocacy, Research and Education for the benefit of public sector pension stakeholders.”

NCPERS helpfully discloses those 36 corporations who have purchased the “enhanced level of corporate membership,” and it includes some of the most powerful financial firms on earth. To name a few: Acadian Asset Management, BNY Mellon, Evanston Capital Management, J.P. Morgan, Milliman, NASDAQ, Nikko Asset Management Americas, Northern Trust, Prudential Insurance Company, State Street Corporation, and Ziegler Capital Management.

One would think corporate members with this much clout would mean the tail wags the dog, but NCPERS is a very big dog. As the political voice for nearly all major state and local public employee pension systems across the entire U.S., their lobbying muscle is backed up by nearly $4.0 trillion in invested assets. At one of their recent conferences, Chevron was a “platinum sponsor.”

Will Chevron ever oppose the lobbying agenda of NCPERS? Probably not. According to Yahoo Finance, BNY Mellon owns 1.34% of Chevron’s stock, Northern Trust owns 1.35%, and State Street Corporation owns 4.7%. That’s just the holdings of the NCPERS “enhanced members.” Moreover, pension systems don’t just invest through intermediaries such as BNY Mellon, they invest directly in these corporations. There is no financial special interest purchasing publicly traded U.S. stocks that is bigger than the pension fund members of NCPERS, and there is no client to the financial firms on Wall Street bigger than the pension fund members of NCPERS. Nothing comes even close.

No report on NCPERS would be complete without documenting just how thoroughly it is dominated by public sector and union operatives. Their president “served 3 terms on the Chicago Fire Fighters Union Local 2 executive board, resulting in two decades of union leadership.” Their first vice president, a retired police officer, “served as the first woman president of her union, FOP Queen City Lodge No. 69, from 2005 through 2015.” Their second vice president “is currently the statewide president of AFSCME Council 67, representing well over 30,000 members in 21 separate political jurisdictions.” Their secretary “has more than 30 years of service as a Tulsa public employee.” Their treasurer “served as a firefighter for 41 years. During his career, he held offices on the board of the IAFF Local 58.” Their immediate past president “is the treasurer of the United Federation of Teachers (UFT), Local 2, American Federation of Teachers (AFT).”

That’s everyone. The entire management team of NCPERS. A government union controlled financial juggernaut, marching in lockstep with the most powerful players on Wall Street. The consequences are grim for the rest of us.

Public employee pension funds are aggressively attempting to invest nearly $4.0 trillion in assets to get a return of 7.0% per year. Collectively, they are underfunded – according to their own estimates which use this high rate of return – by at least $1.0 trillion. And by nearly all conventional economic indicators, today we are confronting a bubble in bonds, a bubble in housing, and a bubble in stocks. The alliance of financial special interests who don’t want this party to end, and government union leaders who don’t want to lose retirement benefits that are literally triple (or more) what private sector taxpayers can expect, is complicit in policies that have allowed these asset bubbles to inflate. When the bubbles pop, they will share the blame.

In the meantime, they blacklist those of us who call attention to their folly.

Ed Ring is vice president for policy research at the California Policy Center.

Posted in California, NCPERS at December 26th, 2016 by Jack Dean| Comments Off on Association of pension funds blacklists reform organizations

December 2nd

Pension Tracker, a Stanford Institute for Economic Policy Research (SIEPR) project, estimates total United States public pension debt (a.k.a., unfunded liabilities) in June 2015 at $5.599 trillion, a 16 percent increase over 2014. The project is directed by Joe Nation, a former state lawmaker, SIEPR researcher, and Professor of the Practice of Public Policy at Stanford.

The study includes the most recent financial data from nearly 300 state pension systems, and it estimates financial data from local pension systems across all 50 states and the District of Columbia.

Among the findings from this update:

• The 2015 U.S. figure of $5.599 trillion reflects Market Pension Debt and is based on a discount rate of 2.75 percent, equal to the 20-year Treasury yield on June 30, 2015. Most financial economists agree that the Market Pension Debt more closely represent financial realities and pension system liabilities. (Actuarial Pension Debt is described below.)

• The 2015 U.S. pension debt figure is 15.9 percent higher than that estimated in 2014, $4.833 trillion.

• This increase of $766 billion in Market Pension Debt is notable since it occurred during a period of economic growth; however, the Market Value of Assets over this same period were virtually unchanged.

• The Market Pension Debt per U.S. household is now $47,388, an increase of 15.0 percent over the 2014 Market Pension Debt per U.S. household of $41,219.

• The median Market Pension Debt among all states and the District of Columbia is $36,740.

• Alaska maintains the highest Market Pension Debt per household at $110,538 in 2015, a 2.4 percent decrease over the 2014 level of $113,137.

• California now has the second highest Market Pension Debt per household at $92,478, a 19.4 percent rise over 2014.

• The lowest Market Pension Debt per household is in Tennessee, Indiana, and North Carolina, with debt per household of $19,586, $19,686, and $22,066, respectively. (The District of Columbia shows the lowest Market Debt per household at $14,020.)

If you view the map presented in the Commonwealth study, there is a strong correlation between states controlled by the GOP vs those controlled by Democrats. Nearly all the Democrat controlled states with large urban populations get D grades, with the notable exceptions of Florida (C), and Texas (A). We can perhaps learn something from the outliers – why did Texas get an A and why does Montana get a D? But California is in a class by itself.

When performing this analysis, the studies author, Priya M. Abraham, created a checklist called “State Labor Comparison” that provides criteria for grading each state. California failed in every category:

Most everyone understands the obvious consequences of California’s status as the most enabling state in the U.S. for government unions. By the time most people read this, there is a good chance that Democrats will have captured a super-majority in the state legislature, allowing them to raise taxes at will. Also obvious, decades of increasing political control by government unions has lead to a state judiciary that consistently favors government unions. This happens not only in nearly all cases involving pension reform, but also in those cases addressing education reform. For example, the recent ruling against the Vergara plaintiffs who, gasp, wanted to reform the union work rules that have nearly destroyed public education in California.

There’s a deeper corruption, however, that is less obvious but even more consequential, and that is the effect union controlled government has on California’s business and financial communities. Corporations that want to do business in California understand that all legislation goes through the unions for approval. All of it. So they make deals, and implicit in any deal is that the union agenda – more government pay and benefits, more government employees, and more taxes and borrowing – is never challenged by the business community.

The financial sector also must adapt, and they’ve outdone themselves. In lieu of pension reform or proper bond oversight, financial firms make billions investing money for the union-controlled government pension funds and underwriting government bonds. For any partner at a financial firm in California to advocate pension reform would be financial suicide. They do what they’re told, or they go out of business.

The high-tech community in the Silicon Valley is probably the most tragic example of how government union power has corrupted an industry. A nefarious convergence of interests has evolved between government unions, utility companies, and high-tech entrepreneurs, to create artificial scarcity of land, energy and water. Hiding behind overstated environmentalist concerns, they have imposed de-facto rationing on Californians. This enables tax revenue that might have been used for infrastructure to instead go to paying government worker salaries and feeding the pension funds. At the same time, it takes the utility rate hikes that might have financed additional infrastructure and feeds it to Silicon Valley “entrepreneurs,” who develop expensive “green” energy solutions, along with systems that eventually will mandate every major household appliance be internet enabled, connected to smart meters, and capable of charging punitive rates if a consumer, for example, runs their clothes dryer at the “wrong” time.

If one refers again to the map showing public union power by state, another correlation becomes clear – union power, generally, is concentrated in states with the highest costs of living. California is again champion in this respect. Artificial scarcity has rendered prices in California for land, energy and water among the highest in the nation. State and local taxes are also among the highest in the nation. California is Exhibit A for how public unions and elite oligarchs have combined forces to create challenges for ordinary people that amount to outright oppression.

If the 2016 election will be remembered for anything, it will be remembered as a time of populist awakening. Americans in unprecedented numbers have registered their discontent with a system they consider rigged. But not once in what was one of the most visible national elections in American history did anyone, anywhere, identify the root cause of government overreach and capitalist corruption: Government unions.

October 23rd

“The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title.” – California State Senator Kevin De Leon, August 7, 2016, Sacramento Bee

By Ed Ring | This quote from Senator De Leon, one of the main proponents of California’s new “Secure Choice” retirement program for private sector workers, says it all — because De Leon’s comment reveals the breathtaking hypocrisy and stupefying innumeracy of California’s legislature.

Let’s start with hypocrisy.

De Leon is careful to protect private sector taxpayers from having to bail out their new state administered “secure choice” retirement plan, but no such safeguard has ever been seriously contemplated for the state administered pension plans for state and local government workers. These plans, using official numbers, are underfunded by about $250 billion. If you don’t assume California’s 92 state and local government worker pension systems can earn 7.5% per year, they are underfunded by much more – at least a half trillion.

Underfunded government worker pensions are the real reason why Prop. 55 is offered to voters to extend the “temporary” “millionaires tax” till 2030. That will raise about $6 billion per year. Underfunded local government worker pensions are also the reason for 224 local tax increases proposed on this November’s ballot, which if passed will collect another $3.0 billion per year. And it isn’t nearly enough.

The following table, excerpted from a recent California Policy Center study, shows how much California’s state and local government pensions systems have to collect per year based on various rates of return. At the time of the study, the most recent consolidated data available was for 2014. As can be seen – at a rate of return of 7.5% per year, state and local agencies have to put $38.1 billion into the pension funds. And at a rate of return of 6.5% per year, which CalPERS has already announced as their new “risk free” target rate, they have to turn over $52.3 billion per year. How much was actually paid in 2014? Only $30.1 billion.

To summarize, in 2014 the pension funds collected $8.0 billion less than they needed if they think they can earn 7.5% per year. But following CalPERS lead, they’re lowering their projected rate of earnings to 6.5%, which means they were $22.2 billion short. There are 12.8 million households in California. That equates to at least $1,734 in additional taxes per household per year just to keep state and local pensions solvent.

And it gets worse. Because in order to ensure this new “Secure Choice” program doesn’t get into the same financial predicament that California’s government pension systems confront, the “risk free” rate of return they intend to project is not 7.5%, or 6.5%, or even 5.5%. No, they intend to initially invest the funds in Treasury Bills, which currently pay at most 2.5%. In an analysis of Secure Choice’s proposed costs and benefits performed last April, we express what using a truly “risk free” rate of return portends for California’s private sector workers vs. public sector workers. These estimates are based on all participants, public and private, contributing 10% to the fund via withholding.

Public sector: Teachers/Bureaucrats, 30 years work – pension is 75% of final salary.

Public sector: Public Safety (police and firefighters), 30 years work – pension is 90% of final salary.

Private sector: “Secure Choice,” 30 years work – pension is 27.6% of final salary.

There are two reasons for this gigantic disparity. First, public pension funds collect far more than 10% of salary. While the employee rarely pays more than 10% via withholding, the employer – that’s YOU, the taxpayer – typically kicks in another 20% to 40% or more, that is, a two-to-one up to a four-to-one employer matching contribution. Second, to justify the optimistic projections that make such generous pensions appear feasible, public pension funds have assumed a “risk free” rate of return of 7.5% per year.

Which brings us to innumeracy.

During the fiscal year ended 6/30/2015, CalPERS earned a whopping 2.4%. That stellar performance was followed in fiscal year ended 6/30/2016 by a return of 0.6%. It doesn’t take a Ph.D economist to know that California’s pension funds are going to need to greatly increase their annual collections. It only takes horse sense. But even horse sense eludes California’s innumerate lawmakers.

So here’s a modest proposal. Why not freeze the employer contributions into California’s state and local employee pension funds at 20% of salary (that’s a two-to-one match on a 10% contribution via withholding), and then, constrained by those fixed percentages, lower all benefits, for all participants, on a pro-rata basis to restore solvency. Better yet, why not enroll every state and local government employee in the Secure Choice program? Either way, “the state shall not have any liability for the payment of the retirement savings benefit earned by program participants.”

Along with this modest step towards dismantling the excessive privileges of these unionized Nomenklatura who masquerade as California’s public “servants,” why not enroll all state and local government employees in Social Security? Because California’s public servants make far more, on average, than private sector workers, and because Social Security benefits are calibrated to pay relatively less to high income participants, this step will financially stabilize the program.

Senator De Leon, are you listening? When it comes to state administered programs, all of California’s workers, public and private, should get the same deal.

October 5th

By Ed Ring | Government unions in California collect and spend over $1.0 billion per year. That’s just government unions. That’s just California. They use a small fraction of this money to engage in collective bargaining. They use about a third of it to engage in politics – that’s nearly $700 million per election cycle. The rest, well over a billion per election cycle, goes to “educate” the public.

A billion dollars a year to pursue the government union agenda. You can argue this figure. Maybe it’s $800 million. Maybe, and more likely, it’s $1.2 billion. Nobody knows for sure, because government unions are required to reveal even less about their operations than private unions or public corporations. In an attempt to obtain more accurate membership and dues numbers, we spoke with an expert on public sector unions at Pepperdine University. He said that California has over 6,000 “locals” that have organized government workers into unions. In many cases, each of these locals files their own 990 form with the IRS. Our own analysis, stated in a California Policy Center study “Understanding the Financial Disclosure Requirements of Public Sector Unions,” summed it up as follows:

To amalgamate the financial information provided by literally thousands of local public sector union affiliates across every department and agency throughout California’s 478 incorporated cities and 57 counties would be a herculean task, but it is reasonable to assume that the total annual dues revenue and expenditures of California’s public sector unions is at least twice the total derived from totaling these 16 major organization’s 990 data. Put another way, at the end of 2010, following a lively election season, California’s public sector unions, collectively, were probably still sitting on well over $200 million in cash, and had just spent nearly $1.0 billion dollars on collective bargaining and political activity. It is left to the reader to ascertain why any spending to pursue the agenda of organized government workers is not intrinsically political, but dissecting actual political spending from the sparse data provided in 990 forms is an exercise in futility.

With this kind of money, you can hire a full time, professional army. And they have. When political candidates who are not backed by government unions decide to run for office, they either have to be independently wealthy, or they have to spend nearly all of their time soliciting donations. Campaign “reform” has made it impossible for a candidate to find just one wealthy donor, so unless they’re personally rich, they are in perpetual fundraising mode. The government union backed candidates, on the other hand, are often recruited to run for office by these unions, and have to do nothing more than sign a few forms that have been prepared for them in advance. The unions then run a turn-key operation to put them in office, telling them what to say and where to appear.

That’s not how politics is supposed to work in a democracy. No wonder government unions have taken over nearly every city, county and school district in California, along with the state legislature.

When it comes to “educational” efforts, the government unions spend even more money than they spend on direct political action. From Sacramento outwards to cities, counties and school districts, they hire the most capable consultants that money can buy. The finest attorneys, the most creative and capable public relations professionals, academic experts, polling wizards, media gurus. And, of course, these government unions fund “Think Tanks” that promote their agenda relentlessly.

Without this billion-dollar-a-year torrent of money, political advocacy and policy analysis works the way it’s supposed to work. Political campaigns and policy shops alike are required to present their vision to donors who then decide whether or not to support them. But when these interests, sustained by capricious pittances, are pitted against the government union machine, the outcome is predictable. They lose. And lose. And lose. California is Exhibit A for how a democracy is destroyed by a government that serves itself.

If there wasn’t an intrinsic conflict of interests between what government unions advocate – more power for government agencies and more wealth for government workers, with the welfare of private citizens a secondary concern – perhaps none of this would matter. But California, where government unions have ruled for decades, is a trendsetting travesty of how a democracy is supposed to function. It is a state where appeasing the government unions is a prerequisite for success in business. It is a state where giving up and living on government entitlements is increasingly preferable to trying to make a living when everything – housing, transportation, energy, water, and perpetually rising taxes – is punitively expensive thanks to bad policy choices. And it is a state where unionized government workers earn pay and benefits that average twice as much as what private sector workers earn, rendering them relatively immune to the consequences of their unionized government agenda.